Last week, Sony’s shares saw a value loss of about $10 billion when the Japanese electronics giant reduced its sales projections for the PlayStation 5, its flagship platform, for the upcoming fiscal year.

Analysts said that a greater concern for the company is its diminishing margins in its core gaming industry, adding to their already high opinion of Sony’s ambitious PS5 aim.

This week, Sony revealed that, contrary to its earlier prediction of 25 million devices sold, it now projects selling 21 million PS5s for the fiscal year that ends in March.

Following the announcement, the company’s shares dropped, losing around $10 billion in value since the prediction was lowered, based on calculations made with FactSet data.

However, the operating margin in the gaming industry, which came in at less than 6% for the December quarter, according to estimations, was another important statistic that analysts were keeping an eye on. In contrast, Sony’s operating margin for the December quarter of 2022 exceeded 9%.

“The shipment forecast cut for PS5 … is not what is disappointing … What is disappointing is the low level” of operating margin, Atul Goyal, equity analyst at Jefferies, said in a note to clients on Wednesday.

He continued by saying that the gaming unit’s margins had been between 12% and 13% for the preceding four years, prior to the January–March quarter of 2022.

Goyal described the situation as “extremely disappointing” and stated that the single-digit margin for Sony in the most recent quarter persists “despite various tailwinds that should have driven up the margins towards 20%.”

Sales of its first-party games, which are increasingly available as digital downloads, as well as its profitable PS Plus subscription service, which, according to Goyal, fetches a 50% margin, are among these tailwinds.

“Their rev (revenue) on digital sales, add-on-content, digital-downloads are at all time highs… And yet their margins are at decade-lows. This is just not acceptable,” Goyal said.

Goyal clarified that Sony’s game business’s margin is currently “almost near decade lows.”
The analyst questioned why the gaming division’s operating margin has stayed so low in light of all these higher-margin goods.

The CEO and creator of Tokyo-based games consultant Kantan Games, Serkan Toto, stated that he thought hardware production costs had actually decreased because, by now, Sony would have better economies of scale and the PlayStation 5 is older than three years old.

According to Toto, growing software manufacturing costs are a contributing factor in the recent compression on margins.

“Spiderman 2,” which came out last year and is produced by Sony-owned Insomniac Games, cost around $300 million to make, according to gaming website Kotaku, citing an internal presentation that was leaked after a ransomware group hacked the company.

“So these budgets seemed to have a significant impact on their gaming margin over time,” Toto said.

There were no comments on the issue available from Sony and Insomniac Group.

(Adapted from NewsBreak.com)